Truckload markets resume their decline

This week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)

The FreightWaves Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.

This week’s Pricing Power Index is based on the following indicators:

Freight demand takes a hit

Unfortunately but not unexpectedly, the post-holiday momentum that was driving a rise in tender volumes has been lost. While I hate to sound like a broken record, it seems as though peak season is nowhere to be found this year. Retailers continue to struggle against a glut of inventory with flagging consumer demand, canceling orders whenever possible and bringing down freight demand as a consequence.

This week, the Outbound Tender Volume Index (OTVI) fell 1.13% on a week-over-week (w/w) basis. On a year-over-year (y/y) basis, OTVI is down 24.14%, although y/y comparisons can be colored by significant movement in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Contract Load Accepted Volume (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders. Looking at accepted tender volumes, we see a dip of 0.7% w/w but also a fall of 7.1% y/y. This y/y difference confirms actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

Fears of a global recession were stoked late last week, when FedEx announced a $500 million quarterly earnings shortfall. The following day, FedEx stock dropped 21% — its largest single-day drop ever. The shortfall was largely driven by losses in FedEx Express, its air cargo division, and FedEx Ground, its parcel delivery service. These losses, of course, raise questions about globally softening demand for goods, though some market analysts instead point the finger at company mismanagement.

Of the 135 total markets, 64 reported weekly increases in freight demand, though many of these gains were seen in smaller markets.

Ontario, California — the largest market by outbound tender volume — saw volumes slide 6.17% w/w. This decline is driven by weakening activity at the ports of Long Beach and Los Angeles, which is itself caused by both shippers’ redirection of imports to East Coast ports as well as lower import volumes more broadly. Atlanta, the second-largest market, performed comparatively well but still posted losses for the week, with its OTVI falling 1.5% w/w.

By mode: Van volumes, though dipping on a w/w basis, outpaced the overall OTVI this week. The Van Outbound Tender Volume Index (VOTVI) fell 0.53% w/w and is down 25.04% y/y, but that difference is largely attributable to plummeting rejection rates. Reefer volumes are in a more notable state of contraction, with the Reefer Outbound Tender Volume Index (ROTVI) down 1.45% w/w and 29.57% y/y.

Rejection rates fall to new cycle low

At present, OTRI is at its lowest level since May 2020, briskly approaching 5% and below. This time in 2019, when the trucking industry last underwent a recession, OTRI was at 5.2%, coming down from its mid-September peak of 6.02%. But we have seen no such September bump this go-around and, given depressed volumes in a historically busy season, it’s unlikely that such a rise is merely postponed to October.

Over the past week, OTRI, which measures relative capacity in the market, fell to 5.18%, a change of 37 basis points (bps) from the week prior. OTRI is now 1,689 bps below year-ago levels.

The average rate on a 30-year fixed mortgage has risen above 6% for the first time since 2008, cooling demand in the red-hot real estate market. Per data from the National Association of Realtors, sales of previously owned homes fell 0.4% m/m to their lowest level since May 2020. While the median existing-home price tumbled for the second consecutive month in August, home prices are still up 7.7% y/y. This pincer movement of rising home prices and mortgage rates is, for the time being, unlikely to let up. 

Following its September meeting, the Federal Open Market Committee (FOMC) declared that it would raise interest rates by a further 75 bps, bringing the target range between 3% and 3.25%. According to a recent poll conducted by the University of Chicago’s Booth School of Business, two-thirds of the surveyed economists expected the current tightening cycle to peak at a federal funds rate between 4% and 5%. Nearly half of those polled do not expect any cuts until the first half of 2024, while a plurality (36%) believe that the FOMC’s hikes are “too little, too late and insufficient to help keep inflation under control.”

The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. As capacity is generally finding freight, only a few regions this week posted blue markets, which are usually the ones to focus on.

Of the 135 markets, 51 reported higher rejection rates over the past week, though 31 of those reported increases of only 100 or fewer bps.

By mode: Despite suffering a notable decline in volume, reefer rejection rates had a pretty significant jump this week. The Reefer Outbound Tender Reject Index (ROTRI) rose 113 bps w/w at 7.83%. This rise could be pure momentum from the earlier gains in reefer volume from autumn produce, though it could equally signal a mismatch between regional demand and supply. 

Flatbed and van rejection rates alike were in the red this week by roughly equal measure, though flatbeds continue to be the tightest mode in which to secure capacity. The Flatbed Outbound Tender Reject Index (FOTRI) fell 43 bps w/w to 15.76%, while the Van Outbound Tender Reject Index (VOTRI) fell 46 bps w/w to 5.14%. It is as yet unclear when — and by how much — the decline in housing starts and homebuyers’ activity will affect flatbeds, since flatbed demand could be sustained by the oil and gas industry.

Rates fall sharply in the 11th hour

As with volumes and tender rejections, carrier rates have relinquished any holiday gains they had. The average price of diesel fell below $5 per gallon this week, returning to levels last seen in late August. Further price decreases could well be on the horizon, given the Federal Reserve’s interest rate hike of 75 bps and hawkish remarks this week.

This week, the NTI fell 4 cents per mile to $2.64. Half of that decline can be pinned on falling diesel prices, while the other half was reflected in the linehaul variant of the NTI (NTIL). The NTIL, which excludes fuel costs and other accessorials, fell 2 cents per mile w/w to reach $1.88.

Contract rates, which are base linehaul rates like the NTIL, are just now showing their comedown from Labor Day, as they are reported on a two-week delay. Contract rates fell 7 cents per mile this week to $2.69. While it might have been expected that contract rates would rise for Labor Day, they actually fell on the holiday, contrary to all seasonality and common sense.

The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to all-time lows in the data set, which dates to early 2019. Throughout 2019, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021. 

Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020, as contract rates currently outpace linehaul spot rates by 78 cents per mile.

The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, seems to have met its floor. Over the past week, the TRAC rate grew 1 cent per mile to reach $2.65. The daily NTI (NTID), which fell deeply to $2.59, is being outpaced by rates from Los Angeles to Dallas.

On the East Coast, especially out of Atlanta, rates did suffer a decline but are still beating the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia fell 14 cents per mile this week to settle at $2.68. Rates along this lane have been falling since mid-July, when the TRAC rate was $3.48 per mile. Low inventory of diesel fuel in the Northeast could soon drive outsized prices, which in turn would place upward pressure on rates to the region.

For more information on the FreightWaves Passport, please contact Kevin Hill at [email protected], Tony Mulvey at [email protected] or Michael Rudolph at [email protected].